SEC Slaps FINRA on Handling of Records

The SEC has ordered FINRA to improve the way it handles documents submitted during SEC inspections. The order, issued Thursday as part of an administrative settlement between the two organizations, comes after the disclosure that the director of FINRA’s Kansas City Office in 2008 ordered the minutes of three meetings dating back to 2006 and 2007 to be altered hours before they were they were provided to the SEC’s Chicago Regional Office.

“The director’s misconduct is the third instance is an eight-year period in which a FINRA employee had altered minutes prior to submission to the SEC,” said Gerald Hodgkins, an associate director in the SEC’s Division of Enforcement. “There’s a requirement that (documents) be accurate and complete and when they’re not, there’s a problem.”

The order comes at a time when members of Congress are considering taking a series of steps to strengthen enforcement of the investment advisor community. One measure under consideration is that FINRA become the main regulatory body for advisors — a move advocated by FINRA itself. The idea raises the hackles of many independent advisors. The coalition of the FPA, NAPFA and the CFP Board wants to see enforcement remain with the SEC.

“We see a conflict of interest in an organization that is heavily influenced by the broker-dealer mentality and culture in overseeing investors who are held to a fiduciary standard,” said Marilyn Mohrman-Gillis, managing director of public policy and communications for the CFP Board.

Mohrman-Gillis said the alteration of minutes is not surprising given that a Boston Consulting Group study released in March expressed concerns about FINRA’s accountability and transparency measures.

A non-governmental agency, FINRA was created in 2007 by a combination of the NASD and some regulatory functions of the NYSE. It is a self-regulatory organization or SRO. The revelation about the alteration of minutes came as the result of an internal FINRA investigation that FINRA then reported to the SEC.

FINRA Chairman and CEO Richard Ketchum released a statement about the SEC order today in which he said, “We self-reported the Kansas City matter to the SEC and have fully cooperated with the agency’s review. … Under no circumstances will such conduct be tolerated at FINRA.” The meetings occurred prior to the July 2007 creation of FINRA by consolidation, Ketchum said in the statement.

In the wake of the revelations, some of which were reported via an internal whistleblower program, FINRA appointed new leadership in Kansas City, and added online and live ethics training for all its employees with a focus on document handling. As part of its settlement with the SEC, the organization has also retained an independent consultant to review these changes and determine if they are sufficient.